TSB will halve the interest rate it pays on its Classic Plus current account from 3% to 1.5% AER from 2 May. Is it time to switch?
This move comes after Santander announced it would cut interest rates on its 123 current accounts from 1.5% to 1% from 5 May – squeezing the options for customers who like to use their current account as an easy-access savings account.
Here, Which? calculates what the cut will mean for TSB customers, how it will compare with what other banks are offering and whether you should switch or consider a savings account.
What does the cut mean for TSB customers?
From 2 May, the interest on Classic Plus current accounts will drop from 3% AER to 1.5% AER variable, meaning customers will earn £22.02 less a year.
Interest is only payable on the first £1,500 in credit on your account so the maximum you will be able to earn after a year is £22.38 provided the rate doesn’t change any further.
Other qualifying conditions that you must meet to earn interest include:
- pay in at least £500 a month into the current account,
- register for internet banking and
- opt for paperless statements and paperless correspondence.
TSB has been on shaky ground since its IT failure in April 2018 meant thousands of customers couldn’t access their accounts.
To make up for the chaos the bank upped the rate on the Classic Plus from 3% to 5% AER. However, the bank’s peace offering was cut a year later in April 2019, and now customers are being hit with another blow to benefits.
This latest hit could mean customers vote with their feet and switch to another provider.
- Find out more: current accounts we’re all switching to
How will TSB compare to other banks?
Those hunting for interest on their current account balances may consider switching but high-interest current accounts on offer elsewhere are also becoming leaner.
Although TSB will chop its rate to 1.5% AER, it will still rank in tables as the second-highest payer by 5 May after Nationwide’s FlexDirect at 5% AER, above Santander’s 123 at 1% AER.
Nationwide’s FlexDirect pays 5% AER on balances up to £2,500 so the most you can earn is £125 – over £100 more than at TSB from 2 May.
Of course, there are catches. Although there are no fees with FlexDirect, that attractive 5% rate is dropped to 1% after the first year. You must also pay in £1,000 monthly and can’t have opened a FlexDirect account before.
The Santander 123 account will pay 1% AER on from 5 May. Although it’s a smaller rate you can save up to £20,000, so is more suitable for larger balances. However, you will need to pay £5 a month to have the account- or £60 a year.
You would have to keep at least £18,500 in a Santander 123 account for a year, to equal the return offered by Nationwide, after the £5 a month fee is factored in.
- Find out more: best high-interest bank accounts
Current accounts vs savings accounts
For the last few years, current accounts that pay high levels of in-credit interest have been an alternative to easy-access savings accounts which offer miserly returns.
Often the hoops savers would have to jump through to meet the conditions of a current account such as the minimum monthly funding amount and account fee were worth it.
But from May this savings hack might have to be revised as current account interest rates are cut down to the bone.
Right now the highest-paying easy-access savings account pays 1.35% AER, so Nationwide’s 5% rate and even TSB’s 1.5% rate is likely to still be compelling.
However, Santander’s 1% rate will be well below what you can get from the savings market. So those with money stashed in a 123 account may need to turn to a saving account to ensure their money is getting the best return.
- Find out more: how to find the best savings account
Other factors to weigh up before switching
When looking for a new current account that pays interest, the headline rate shouldn’t be your only priority.
It’s also worth considering other benefits you get as a customer like a linked savings account, cashback, fraud protection and customer service.
Nationwide, for example, is a Which? Recommended Provider and has been for the last five years. Real customers rated the brand highly and its products continue to push it into the gold standard.
That said, a key reason for keeping your current account with TSB could be is its Fraud Refund Guarantee.
This is an important benefit for peace of mind as the number of authorised push payment scams escalates.
Many banks (though not all) have signed up to a voluntary code that means they must protect victims, but Which? has found they are still wriggling out of paying refunds to some victims.
TSB is not a signatory of this code but it promises to reimburse all victims of fraud under its guarantee.
- Find out more: find out what real customers think about their current account provider in our guide to the best and worst banks
How easy it is to switch?
If you are considering switching, it makes sense to use the automated seven-day Current Account Switch Service.
This guarantees that if something goes wrong during the switch, any charges or interest incurred (as a result of the switch) on the old or new account can be refunded.
It provides more protection than manual switching but it does mean your old account will be closed down.
Over one million current accounts have been switched since the service was launched in 2013. In the last quarter of 2019, over 99% of switches were completed within the promised seven working days.
- Find out more: how to switch your bank account